An existing mutual influence between testosterone (T) and glucose metabolism has been suggested by studies showing that men with low T have impaired glucose tolerance, while a significant number of men with type 2 diabetes mellitus (T2D) and obesity have low T. Thus, it is not surprising that as much as 64% of men with T2D were found to have low T. Hypogonadism and diabetes mellitus (DM) each is associated with increased risk for fractures. While hypogonadism is associated with increased bone turnover and bone loss. DM is associated with low bone turnover and normal or high bone mineral density (BMD) but paradoxically a high risk for fractures. Our preliminary data showed that compared to non-diabetic hypogonadal men, men with both conditions have suppressed bone turnover, higher volumetric BMD (vBMD) and smaller bone size. As the effect of T on the male skeleton is mainly mediated by its conversion to estradiol (E2) by the enzyme aromatase, the possibility of further suppression of bone turnover with T therapy in these patients would be a concern. However, our initial data also showed that T therapy in men with both conditions resulted in increased in markers of bone turnover and bone size compared to the decrease in bone turnover and decrease in bone size in men with hypogonadism only, suggesting activation in bone remodeling and improvement in bone geometry in the former. Furthermore, we also found a trend for increase in bone strength (by finite element analysis or FEA) in the limited number of men with both low T and T2D randomized to T compared to placebo. These findings only suggest but do not prove with certainty that T therapy would be beneficial to men with both low T and T2D. The central hypothesis of this study is that T therapy will result in improvement in bone quality in patients who have both hypogonadism and T2D. Thus, the specific aims of this proposal are: 1) to determine the effect of T therapy on bone strength as assessed by finite element analysis (FEA) using high-resolution peripheral quantitative computer tomography (HR-pQCT), 2) to determine the effect of T therapy on markers of bone turnover, and 3) an exploratory aim, to evaluate the mechanism for improvement in bone quality from T therapy. We hypothesize that because T stimulates osteoblastic proliferation and differentiation, the ensuing increase in osteoblast number will lead to an enhanced cross-talk between osteoblast and osteoclast resulting in activation of bone remodeling and replacement of old with new bone, hence, improvement in bone quality. In this study we will enroll 166 men with T2D and hypogonadism and randomize them to either testosterone gel 1.62% or placebo for 12 months. The following main outcomes will be evaluated: aim# 1) change in the primary endpoint which is FEA, by HRpQCT, #2) changes in C-telopeptide (CTX) a marker of bone resorption, and aim #3) changes in circulating osteoblast progenitor (COP). We anticipate an increase in FEA at the tibia and radius suggesting improvement in bone strength, increase CTX and increase in circulating osteoblast progenitors. We further anticipate an increase in other markers of bone turnover (both bone formation and resorption) and osteoclast precursors in men with hypogonadism and T2D randomized to T compared to placebo. Given the suppressed bone turnover at baseline in men with low T and T2D, we hypothesize that the beneficial effect of T is its effect in activating bone remodeling ultimately resulting in improvement in bone quality. Results from this study will provide information on the utility of T not only in improving quality of life but also in improving bone quality in hypogonadal men with T2D. Given the relationship between glucose metabolism and testosterone production, and the increasing number of male patients diagnosed with both hypogonadism and T2D, this study will benefit not only the significant number of male veterans who have both conditions but also men in general.